BiggerPockets

You'll get differing opinions here on this question (it's a common question), so you'll need to make a judgment call...but here's my opinion as a non-attorney and non-tax-professional...

There are two reasons to have a corporate entity:

1. Asset protection

2. Tax advantages

If you have significant personal assets that you want to protect, a corporate entity can provide at least some protection; the more you know/learn about running a corporate entity and the more you're careful about not doing anything negligent, the more the entity will serve as protection for you.

As for tax advantages, the more money you make with the business, the more important having those advantages will be, and therefore the more likely you'll want to have an entity that will provide those advantages.

That said, insurance (in my opinion) is a must, whether you have a business entity or not...they are NOT mutually exclusive things.

Lastly, I would suggest talking to a good attorney and/or CPA/accountant who can better guide you through these decisions...

Hi J Scott,

I totally understand your points. I guess I thought because I am an out of country investor and it was my first investment in USA and I don't have millions in assets I may be able to avoid this. I have read that an LLC can to easily be pierced in a suite against it and most times they end up not protecting you at all. I guess thats why you get a really good attorney.

As far as tax, I thought there wasn't any tax benefits of an LLC but there is if you decide to go through an S corp or something? Again, need to find myself a reputable accountant because I am out of country.

I guess if I set up an LLC based in Georgia then at least this makes opening the bank account easier because It would be a US LLC. Also, if I open an LLC and want to place $3000 emergency fund in there to start is this allowed or am I then considered mixing up personal funds?

Either way, a good lawyer will be needed, any suggestions as to names etc in Atlanta? Same applies to a good accountant in Atlanta? SInce I have little to no networks in Atlanta it is difficult for me to know reputations etc? I understand however if you don't want to giveaway any of your contacts, if you do shoot me a PM.

My wife and I are coming over to Atlanta July 21 for 3 days to meet some contacts and hopefully close on a property once we find one. Hope we didn't put the cart before the horse by booking our tickets before we found the property.

Sorry for the longwinded message but I do appreciate you opinions.

Peter

Hi Scott,

As they say, better safe then sorry.

Thanks for your real life situation, its true, it could happen anytime and the LLC and insurance will at least protect my other personal assets from some lawsuit. I can't say I am a fan however, that the LLC doesn't protect that asset under the LLC such as the home being rented, I assume this is where the insurance comes in?

Peter

What about costs in each scenario? It seems that an LLC is actually less expensive than an annual umbrella policy. My understanding is that the LLC is a one time cost to set up versus a recurrring annual premium for umbrella policy.

I currently only have a high dollar umbrella policy so I am curious as to the financial as well as the risk side.

Thanks Scott. I had 1mil umbrella until the early 90's when I read about a 3mil judgement on a burn case very similar to yours. I've had 5mil since then. My cars, boats, etc., are all attached to the umbrella.

I have both and then something else- an irrevocable family trust, which i've explained several times in blogs/threads here on BP. An LLc ONLY does certain things. An insurance policy ONLY covers certain things. I sleep well at night with the 3rd step covered.

Scott- sorry about your recent troubles. I did reply to your message awhile ago. Rich

For those wondering about Scott R's incident with the hot water, he has this thread:
http://www.biggerpockets.com/forums/52/topics/58169-wow-what-now-

I've heard this as well, but just like all the stories I've heard that Big-Foot exists, nobody ever seems to substantiate the claim. Here's what I would like to know.

First, were the LLC's and corporations that had their veil so "easily" pierced being maintained properly? Were the owners and officers behaving in a reckless and negligent manner? Obviously, if you fail to maintain your entity properly and/or act like an idiot, no limited-liability company is going to help you.

Secondly, if LLC's are so useless, i.e., they don't offer the protection they are primarily formed for, why are they so freekin' popular? If they were always getting set aside in court, with little to no effort by the plaintiffs, then why hasn't the word gotten out, like extended-warranties, that they're a waste of money?

Finally, what would a state, such as California which makes so much money from LLC's and corporations ($800/year minimum tax), stand to gain by having their entities rendered so powerless? If my LLC ever got challenged and the court set aside my veil without a blink of an eye, guess what? I would dissolve my LLC and that would be the last entity I would form in California. IOW, they could kiss that $800 annual check goodbye. Imagine thousands on businesses deciding to conduct business as sole-proprietors and partnerships instead? Would it behoove states to give their entities some "teeth" in the law?

FWIW, I do know one person who attacked California corporations on a regular basis. My father used to work for the State of California in business tax enforcement. He was often in court trying to set aside corporate veils. His experience? Piercing a corporate veil was NOT an easy matter. They (he and state attorneys) would look for evidence of poorly maintained corporate documents and attempt to prove the business was acting as an "alter-ego" for the owner's private affairs. However, if the state couldn't find anything blatantly irregular, the court almost always upheld the corporation. Keep those $800 checks coming!!! :mrgreen:

There's a BIG difference between revocable and IRREVOCABLE trusts and Rich was referring to the latter. Your assets are safer with an IR-revocable trust, but then again, they're not "your" assets anymore. :wink:

Hi,

I guess a couple things come to mind to me in regards to an LLC and questions they raise:

1) An LLC doesn't prevent lawsuits just protects your other assets as LONG as you haven't broken the corporate veil/mixed funds and been negligent. In itself this is alot to control and manager and faith you put in other people to manage. You still have to go through the legal process as owners of the LLC and you still risk any assets under that LLC, correct?

2) Whether I have an LLC or not if negligence was found an LLC will not protect my personal assets, right?. I don't plan on being negligent but sometimes it comes down to perception of negligence between two parties.

3) Wouldn't negligence be the only reason a tenant would sue a landlord which would still have to be proved or disproved regardless of an LLC or privately owned? (I can't remember from my last law course 12 months ago) Should the verdict come back as you were negligent than regardless of an LLC or not they can come after personal assets outside of the LLC?

So, woudln't it make more sense for me to keep it in my personal name where I have more control and don't risk adding additional factors such as having to prove on top of the negligence suit, that my LLC was not pierced, which from what I hear is much more difficult then one believes as it is the first thing a plaintiff will attack in such a case. I can Buy great insurance including a large Umbrella and of course, cover my $^%#@ by recording everything when it comes down to tenants, the state of the dwelling etc and ensure I am not negligent, giving my tenant no reason to sue?

Not to mention I am an out of country investor so this in itself is a nice form of protection as the tenant would unlikely be able to track other assets down due to my situation. How is a landlords assets tracked, using his US ITIN number or EIN if an LLC? If so all this will show is the rental property and income/loss from that. Not my other assets?

I will have to research this further and more importantly find a great lawyer that can advise me.

Thanks everyone for your insight, I am just trying to understand the whole landlord/tenant thing before I buy.

Your longwinded friend,
Peter